SalesCompInsights

Know Which Investments Will Pay Off

As referenced earlier on this site we recently hosted a web session with Steve DeMarco, VP Worldwide Sales at Xactly, and polled the 500+ registrants for their views on sales force investments.

Not surprisingly given recent economic trends, many companies are adding headcount, training those resources, and arming them with the content and collateral to help them be more successful.

Interesting, it was additional headcount or training that over 20% of the respondents found did not provide meaningful return on investment (ROI).

The good news for companies making or contemplating investment in the sales force is that many folks appear satisfied with the return on such investments. 

Whether you’re satisfied or not assumes some mechanism for tracking your ROI in this area.  Clients frequently ask how they measure ROI in the sales team.  Simply, ROI is the incremental gain in sales from each incremental dollar spent on the sales team and various support mechanisms.   More complex is the interpretation in short-term trends (“we’re spending more as a percent of revenue this quarter than last”) and competitive benchmarking (“we spend 7% and our competitors 9% — is this a good thing?”).

Making sense of data derived from sales force ROI analysis is a little like fixing your dishwasher – seems simple at first but you can quickly get in over your head and have nothing to show for your effort.  Our advice here is select one or two measures that address what’s on the mind of your executive team (related to investments in the sales force, that is).  

The CFO of a medical device distributor told us recently that he asked his head of sales comp why the company’s sales comp expense is increasing when revenues are flat.  The sales comp head apparently replied, with a somewhat blank stare, “Let me get back to you on that.”  The executive told us that was about three weeks ago.

This is a big topic with big implications.  Stay tuned for examples and cases of measuring ROI on sales investments and the implications for sales incentive design and program management.

Flexible With the Course While Staying True to Plan

Joe Glenn has been managing field-based and inbound-phone salespeople for over five years.  During that time his company, specializing in communications and computer-services, measured sales performance on a product-unit basis.  The approach is common in retail and consumer-sales environments, and can be effective for driving transactional behavior from salespeople.  Where the unit-based approach falls short, though, is on goal alignment.  That is, the sales organization can exceed its unit goals while the company misses its revenue target.  In many such unit-based incentive plans, reps focus on those products they can most easily sell without appreciating the financial consequences to the company.

Changing a sales force’s incentive plan can be dicey stuff, particularly when the company adopts new measures of performance.  In Joe’s case, not only did he have to onboard a new measure, but each rep would carry a quota and minimum performance standard.

“We have a very flexible, adaptable sales force, which makes annual changes to the sales comp plans relatively straightforward,” said Joe, who about one year ago started sharing with his sales teams the revenue-plan concept.  “They were on board – it made complete sense to them.”  New goals and a goal-setting paradigm raise the stakes, however.  “Salespeople want to know the goals are reasonable and ultimately, do-able.”  Without the benefit of historical data, salespeople didn’t really know whether their revenue-based quotas were in line.  Adding to the anxiety the plan featured a 75%-of-quota threshold.

Creating quotas was another issue.  Joe’s colleagues in sales operations used the company’s billing system as the source for transactional revenue data, a formable task that didn’t come on line until December.   The new incentive plan was slated for rollout the following month.  Joe was forced to use a limited set of historical data for setting Q1 quotas.

The company launched its new plans during the final weeks of December 2010.  Early into January, salespeople, checking their progress against quota on a daily basis, were becoming concerned.  For most reps, their performance was trending well below where they needed to be to reach the threshold, and earn incentive pay.

Rather than waiting until quarter or even month end, Joe took action.  He and his operations colleagues dove back into the data in search of assumptions that, given the benefit of hindsight, might be off.  

The prospect of adjusting quotas mid-cycle is typically fraught with issues.  While in principle Joe believes an organization should stick to its goals, the revenue quotas were new, and he couldn’t risk the organization having a poor Q1 – a likely scenario should the salespeople disengage after perceiving they couldn’t hit the threshold.

“For the quotas to be effective, we had to be open to regular course corrections,” Joe says.  “This could not be a ‘set-it-and-forget-it’ approach.”  He used a transparent process with company leadership to keep them appraised on the evolving quota-setting methodology.  As more data became available, Joe revised his assumptions.  This included expectations for optimal business mix at the assignment level, and factoring customer churn into a four-year, revenue-per-unit (RPU) projection for acquisitions, where discounted monthly recurring revenue in the first year gives way to more typical RPU rates in Year 2 of the contract.

Joe also added a feature to the plan threshold by including a relative-ranking threshold by market.  Threshold would now be either the 75^th percentile performer in each market group, or the absolute approach (75% of individual quota), whichever was lower in the period.  This tactic provided a reality check to performance in the greater Kansas City market, where unusually harsh weather hammered field sales efforts.

While January revenue results came in below even the revised plan number, February’s pipeline is strong, and Joe projects a record Q1.  His sales teams viewed the revised goals challenging but reasonable, and after shaking off the initial anxiety, set out to beat them.  From leadership’s perspective, the additional analysis and revised goals provided a level of granularity that helps each salesperson focus on the right mix of business.  Reps are selling smarter, and thinking more long term.

One can argue that if the company hits its revenue plan, which in Joe’s case appears very likely for Q1, the course taken to get there doesn’t really matter.  Joe will tell you his approach of staying flexible, transparent and course correcting as he goes has everything to do with a favorable outcome.

Joe Glenn is a director of sales for a communications and computer-services company serving California, Kansas and Missouri.

David Stein, founder/CEO of ES Research Group, Inc. and publisher the popular blog “Commentary on Sales Leadership” for leaders of customer-centric enterprises, recently sat down with our own Mike Meisenheimer to discuss trends in sales compensation.

In this column, “Show Me The Money,” David and Mike observe companies having seemingly everything in place for sales success — hot product, well-oiled sales methodology, tools, support, references, technology, training, coaching, leadership.  But if the sales compensation approach is poorly designed or managed, salespeople won’t stick around, or the company faces the difficult scenario of having to correct an overpay situation (and then the salespeople won’t stick around).

Mike describes during the interview what are three common symptoms of poorly-managed plans:

“1) Under-merchandising the plan launch. Rather than a robust strategy that involves sales management and engages the field, an email comes from corporate; 2) Limited progress reporting; plan participants don’t receive regular updates on their performance; and 3) Lack of detailed incentive reporting.”

There are good insights to keep in mind as you work over the ensuing weeks to redesign your company’s sales comp plans for 2011.

A significant amount of our consulting work involves the processes and technologies used to manage sales compensation programs.   We subscribe to the idea that the sales compensation program is not a series of disparate activities, but an integrated set of processes – design, launch, administer, report, analyze –  that should be managed on an ongoing basis.  We’re often asked about the characteristics of average and high performing organizations in this area and how they can be differentiated.     

The first question might be what do we mean by high, medium and low performers?  We can start with metrics such as the time from close of period to payment, accuracy rate, ratio of plan participants to support staff FTE,  number of disputes,  specific process benchmarks (e.g., date quotas are communicated to the field) and infrastructure dollars per FTE.   Many of these metrics vary by industry, company size and distribution model.  As an example, one of our recent surveys found that almost 60% of direct sales organizations process their incentives in three weeks or less.  Three weeks is typically not realistic for a technology company that relies on sales out partner data to pay their sales teams.   In our surveys’ we also ask about the alignment of the process with the needs of the business and the charter of the organization.  

Those companies that tend to benchmark higher against the different metrics and report higher levels of satisfaction with the alignment of their processes do share some common characteristics.   They are more proactive in their approach to managing the sales compensation process.  Their sales compensation teams commonly adopt more of a leadership position within the organization and overall the program is viewed as a differentiator rather than just a cost of doing business. 

Looking at the design process we observe that the higher performing organizations use a published calendar as an established business practice, clearly define and articulate the roles of the people who participate in that process and have a strong governance model.  There is a former owner of the design process within these organizations and significant cross-functional participation; sales, marketing, finance, HR and IT all have a voice in the final outcome.  From a technology perspective, the higher performing organizations are able to model future plan changes using both historical and forecasted data.  More and more companies are also able to run detailed scenarios and easily promote those scenarios into their production environments.   Taking advantage of newly available tools, plan information, quotas, and other job aids are available online and frequently at or before the annual sales meeting. 

For the administration of the plans, we similarly see formally defined calendars, dates that are essentially set in stone, and a clear owner of the process.   While errors are kept to a minimum (e.g., 98% + accuracy rates based on survey responses), almost as important is a clear process for addressing them.   The administration of the plans is an area where we’ve observed significant improvements in the tools available over the last few years; administrators, managers and plan participants are better able to view the details of any compensation payments on a more frequent basis, initiate a question/dispute based on the information and have that question routed to the appropriate team member.    Other advanced tools are now available to the compensation team including querying capabilities, retroactive processing, detailed auditing/tracking and robust reporting/analytics.   Due to the critical nature of the compensation roles, the leading organizations engage in significant cross-training and education for team members.  From a resourcing perspective, we observe plan participant to administration FTE ratios of 250:1 or greater, as well as the flexibility to quickly adapt to an evolving environment and changes in the sales strategy, coverage model and incentive plans.     

We look at six key elements for each phase of the compensation process when helping our clients assess the effectiveness of their own operations:  1) Process steps and deliverables;  2) Organization structure and roles; 3) Dependencies; 4) Resource efficiency; 5) Tool usage and availability and 6) Process flexibility and alignment.  Tool usage and availability can also be broken down further into elements such as data availability, data storage, functionality and fit with the technology landscape.   Each element can be evaluated on a scale of 1 – 5, helping to lay the groundwork for future projects and attention.  Now that the plans have been launched and things have (hopefully)“settled down” before the next design phase begins, it might be time to take a look at how well your own processes support your various stakeholders and needs.

Three Tips for Transitioning to a Successful Global Sales Comp Program

Have you heard the one about the newly-hired sales compensation manager who has beenasked to transition the company’s far-flung, decentralized sales compensation program to a more centrally manged global umbrella?  We’ve heard multiple versions of this scenario, some mildly humorous, some tragic.  Moving a world-wide, decentralized sales compensation structure to one that’s truly global can be a career-defining (positive or negative) event.

If you find yourself in a similar predicament, we have a few tips to offer.

First, let’s get on the same page with what we mean by global.  Various approaches span a continuum.  On one extreme, the organization has centralized its sales compensation governance, oversight and administration functions, with local (e.g., regional) management responsible for representing regional requirements during the design process.  On the other extreme, regional management has significant autonomy over the design and management of its plans, with corporate playing a support or audit role.  About 1/3 of the global companies we’ve surveyed use a largely a centralized approach.  As you’d expect, the trend is toward greater centralization.

While many regional leaders support the trend on the basis it leads to greater efficiency and, ideally, profitability, sales compensation can be a touchy subject.  Generally, sales managers have a lot vested in the existing program, as it’s a key lever for motivating their teams.  Assume, then, that your regional leadership isn’t quite ready to hand over the keys to their sales comp program.

Tip #1: Build the case for change.  Just because your company has a global head of sales, possibly a newly defined role, doesn’t mean that by default the sales comp program should be global.  Sure, it can be frustrating and exhausting to create an inventory of the various sales comp plans used throughout the company.  But this could be a function of poor recordkeeping.  What does the company hope to achieve by having a more centralized approach?  How will it measure progress toward that goal?  What are the benefits realized by the regional management?

What we’ve seen as the common drivers include:

• Greater consistency in sales execution on global accounts
• Apples-to-apples comparisons of campaign success across regions
• Rapid modeling and deployment of incentive plan changes or new product introductions
• Greater automation and sophistication of sales performance and incentive-calculation reporting
• Audit facilitation and fraud reduction

To the extent the business case appears to regional management as a ploy to lessen their autonomy, expect resistance.  You’re in for a much smoother ride if the organization has decided to undergo some big-bang event, like a major business acquisition or technology implementation.   Sales performance management (SPM) system implementations, like Varicent or Callidus, can do the trick.  Regional heads must pay to play.  Watch the regional leaders’ eyes grow wide during the demonstrations of fancy dashboards and reports.  Far be it for us to promote putting the cart before the proverbial horse, but in a world of spreadsheets, untimely data and manual adjustments, the promise of these systems can put wind in your sails.

Sure, the global head of sales or CEO can pick up the phone and say to the regional leadership, “here’s what we’re going to do.”  Yet, part of your job is figuring out how to move such mountains without having to rely on the executives.  Not that you’re going to drive this global mandate solo.   No, you’re going to get the regions to do the heavy lifting.

Tip #2: Form a Global Sales Comp Task Force.  Just don’t say what the real task is.  Position it instead as a sharing of best practices.  Most sales leaders we work around love to talk about sales compensation.  Funny thing is, two minutes into the discussion, they’re picking apart their own programs.  And for the one or two that think their region’s program is without fault?  Let them think they represent best practice.  The point here is to have your regional leadership perceive they own some of the solution.  And this is as it should be.  These are smart men and women, with years of experience managing and motivating salespeople.  Tap their expertise.

Your role in all of this is to convene the group, help set the agenda, move the discussion from strategy to tactics, and keep the meeting on track.  Demonstrate your expertise by providing pertinent data on sales compensation trends, and using a proven framework to facilitate the discussion.

This isn’t easy.  If you’ve not slogged through such meetings, beware of the frequent rat holes the discussion can fall into.  Language barriers and dialects add to the fun.  After three hours, the regional leadership may feel cleansed and rejuvenated, but you have nothing but pages of seemingly disconnected minutia.  Get help from a professional sales comp meeting facilitator if you suspect you need it.

Tip #3: Become one of them.  I keenly remember the conversation with a regional business leader who picked me up at the Frankfort airport early into one my one of my first global comp assignments.  “Wow, we’ve never had someone from corporate compensation come visit us.”  I didn’t know whether to be flattered or threatened.   

One of the most satisfying aspects of working with the sales organization is, well, actually working with the sales organization.  We find sales leadership, their managers and salespeople to be inherently positive, confident and curious.  That’s their job.  Have you ever attended a national sales meeting?  It’s all good.

Yet, spend some time, one-on-one, with a salesperson and you’ll discover that all is not thumbs up and high fives.  Pay, because a meaningful chuck of it not guaranteed, is usually an issue.  Sales leaders hear about the exceptional cases — the woman who expected to earn €20,000 on a deal for which she didn’t receive credit.  But sales organizations have a way of filtering the daily line frustrations through layers of sales management and cultural bravado.

In the conversation I referenced a moment ago, with the regional business leader, I understood later, over bratwurst and a liter-sized pilsner, that he was appreciative of my initiative to understand his operating environment.  And this is what it takes to appreciate the differences across your company’s global business.  Many factors, like job role execution, legal and labor practices, management philosophy, administrative requirements, and culture and competitive practices, can vary significantly across regions and influence the effectiveness of a particular sales compensation approach.  Good salespeople understand all this because they care deeply about what influences their variable pay.

You may choose to gather this information through surveys and a few phone calls.  We think it’s more cost effective to make the gesture and spend the time in the local market.

Be especially coordinated with the local management during the communication and change-management phase of any new program implementation.  Consistent messaging only works at a high level.  You need to customize and localize the message to clearly explain to salespeople the reasons for and details of change, what the company expects of them and how they can be successful under the new plan.

For more tips on going global, check out these other insights:

http://www.towersperrin.com/tp/showdctmdoc.jsp?url=HR_Services/United_States/News/Spotlights/2007/03_2007_Spotlight_Global_Sales_Comp.htm

http://www.compensatingthesalesforce.com/downloads/WaW_141943_EP.pdf

http://jobfunctions.bnet.com/abstract.aspx?docid=84581

A question we hear frequently in our line of work is, “who owns the sales compensation program?”  In principle, it’s the head of sales, as sales leadership theoretically has accountability for motivating the sales force, and sales compensation is a key motivational tool.

In practice, the answer depends on the organization, and in many companies the ownership over sales comp isn’t clear.

According to OpenSymmetry’s annual sales compensation practices survey last year, 31% of the study’s respondents said the sales function is the organization’s designated owner of the sales compensation program.   Finance was the second most frequent response at 21%, ahead of HR at 17%.  In specific industries the numbers differ.  While the data are fairly consistent since we began the research in 1990, we observe in our work with financial services firms, retail/commercial banking in particular, a shift to finance and HR, away from the lines of business.

In cases where sales does not have formal ownership of the program, we have seen instances of sales leadership not engaged in the requirements phase and final determination of program changes.  This is unfortunate, as the sales leaders may not stand behind the requirements of the new program, yet must motivate his or her team to perform consistent with it.

Having formal accountability does not guarantee meaningful influence.  Leaders over the various stakeholder functions often debate over how best to fix the current plans, or even what’s wrong with them in the first place.  Too often we observe sales leaders making a case for change based on anecdotes and exceptional circumstances – e.g., “Competitor X just offered our top AE a $50k signing bonus.”

What’s missing from these debates is a set of principles, requirements or criteria for shaping plan design decisions, and data to indicate how well the current plan meets those standards.

We recently polled a group of sales, finance and HR leaders on the approaches they use to evaluate how well their sales compensation plans are performing.  Over half said they had no formal process for measuring plan effectiveness and ROI.  Clearly, there’s opportunity for fact-based decision making.

Below we list the most frequently-used reports for analyzing the sales compensation program.  Taken in aggregate, these reports help measure a company’s return on its sales compensation investment:

1. Group Pay Distribution: checks for plan participation rates, compensation efficiency and trending relative to competitive benchmarks for 25^th, 50^th and 90^th percentile earners ;
2. Individual Pay-and-Performance Correlation: identifies potential over- or under-pay scenarios – see scatter plot, left;
3. Quota Attainment Distribution: checks for quota reasonableness and identifies potential over- and under-pay scenarios and engagement issues – see distribution chart, below;
4. Compensation Cost-of-sales Trending and Benchmarking; measures total compensation (individual contributor, supervisor, region/division management) as a percent of revenue relative to competitive trends;
5. Administrative Efficiency Ratios; includes administrative FTE per payee, adjustment volume (occurrence and dollars) rate and system costs (hardware, software and professional-services fees).

(Charts courtesy of Xactly Corporation)

Evaluating the program through robust analytics is but one lever in an overall process for effective program management.  Other attributes include an annual calendar for planning and ongoing program-management activities, and clear accountabilities and decision rights for supporting the program across various stakeholder functions.

The company’s program requirements to a large degree dictate the data necessary for the ROI analysis.  Many firms can’t easily source the data needed, and thus require some investment to enable the analysis.  These are good investments because they provide greater overall program transparency.

The role of the sales leader is to motivate and engage the sales force to sell more.  Sales compensation is a key mechanism.  More important than program ownership the sales leader’s influence over plan change decisions based on objective criteria and analytical findings.

Better Sales Comp Consultants, a sales management consulting firm founded Ted Briggs and Clinton Gott, is hosting a Sales Operations Practices survey.  Scott and I were asked to help develop and facilitate the survey.  We’re excited about the information being collected, and the list of companies participating.  

This is the first in a series of surveys targeted specifically at the sales operations teams in the technology and communications sectors.  While there are several surveys that focus on pay levels, quotas and related information, this is the first ongoing survey focused on the organization approaches, processes and tools used by sales operations professionals. 

This introductory survey examines high level practices in five key areas:  Sales Planning; Account and Territory Assignment; Quota Setting; Incentive Plan Design and Incentive Plan Administration.  The surveys will be conducted every quarter and will assess more detailed practices and trends in each of the five key areas as well as address specific topics requested by survey participants.   The goal of the survey is to provide BSCC clients and other members of the sales operations and sales compensation community data and benchmarks that can help them better assess and enhance their organization’s performance.

So far the responses have been very good.  Several leading technology/telecommunication companies of different sizes.  The survey is going to run through February 3^rd.   If you’re interested in taking the survey you can access it through the link below:

http://bettersalescomp.salesopsssurvey.sgizmo.com

Once the survey is complete we’ll post some of the more interesting results.

Welcome to our blog. 

SalesCompInsights was created by Scott Barton and Mike Meisenheimer.  In our 30+ combined years of working on sales compensation design and management, we’ve collected a lot of  intellectual capital and developed a few opinions on the subject.  So it’s time to share.  This includes reliable information on sales compensation principles, as well as current trends and research. 

Over time SalesCompInsights will continue to evolve based on feedback we receive, specific requests and changes in the broader sales compensation world.  

From time to time, we’ll ask our clients — professionals in sales, HR, finance and sales ops — to comment on industry trends and news that impacts sales compensation policy and administration.

We’d like to hear from you.  Please let us know if there are specific topics you’d like us to cover or comment on posts you find of interest.  Share with us your own sales compensation insights as they pertain to plan design, implementation and administration – things that worked, things that didn’t or questions you’d like to get answered.  We also appreciate a good story. 

We hope you find this site of value.  If you don’t, let us know that, too!